Govt hikes long-term capital gains tax to 12.5% from 10%; clamps down on F&O trading, raises STT

The rate on short-term capital gains (STCG) has been hiked to 20 per cent from 15 per cent. The new rates on LTCG and STCG are applicable from July 23.

In a bid to check the exponential rise in volume in the derivative segment, Sitharaman proposed to double the Securities Transaction Tax (STT) on futures & options (F&O) of securities, effective October 1, 2024.

The rise in taxation on capital gains and STT resulted in a sharp fall in the domestic stock market. The 30-share BSE Sensex plunged 1,277 points, or 1.6 per cent, to touch an intraday low of 79,224.32 after the announcement. The broader Nifty 50 tanked 435 points, or 1.77 per cent, to a day’s low of 24,074.2. Both the indices, however, recovered later, with the Sensex ending at 80,429.04 and Nifty at 24,279.05 on Tuesday.

This increase in STT, which is levied on transactions in specified securities, comes at a time when the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) have raised concerns over the rise in volumes in futures and options segment, which can pose a risk to macroeconomic stability. Sources close to regulatory decision making said the F&O frenzy is threatening to hurt capital formation, investment and growth and pose a systemic risk. “Security Transactions Tax (STT) on futures and options of securities is proposed to be increased to 0.02 per cent and 0.1 per cent respectively,” Sitharaman announced in the Union Budget 2024-25.

Presently, the rate of levy of STT on the sale of an option in securities is 0.0625 per cent of the option premium, while the rate of levy of STT on the sale of a future in securities is 0.0125 per cent of the price at which such futures are traded. However, a section of the market said the hike in STT may not serve its purpose as investors are likely to absorb the higher tax rates and continue the business as usual. The rate of levy of STT on delivery trades in equity shares is 0.1 per cent on both purchase and sale transactions, while in the case of sale of an option in securities where the option is exercised, the rate of levy is 0.125 per cent of the intrinsic price (i.e the difference between the settlement price and the strike price) and is payable by the purchaser.

Commenting on the announcement, Nikhil Kamath, Founder and CEO, Zerodha, said, “We collected about Rs 1,500 crore of STT last year, @zerodhaonline. If the volumes don’t drop, this will increase to about Rs 2,500 crore at the new rates.”

“The long-term capital gains tax has been increased from 10 per cent to 12.5 per cent, and the short-term capital gains tax has been increased from 15 per cent to 20 per cent. Both will be applicable from today (July 23). If the idea was to cool down the activity in the markets, this might just do the trick,” Kamath wrote on X (formerly Twitter). According to Kotak Securities’ President and Head Digital Business, Ashish Nanda, since STT is charged only to the seller, on a round trip premium turnover of Rs 10,000 in options STT will increase from Rs 6.25 to Rs 10. Similarly, in futures, STT will lead to an increase from Rs 1.25 to Rs 2 for every Rs 10,000 of turnover, he said.

Futures and options are derivative contracts that derive their value from underlying assets that include stocks, commodities, currencies etc.